Q9. Trace the reasons for the present economic crisis of Sri Lanka.

“Sri Lanka’s crisis is not just financial; it’s a collapse of governance and trust.” - IMF, 2023

Sri Lanka’s 2022–23 economic crisis its worst since independence was triggered by debt defaults, foreign reserve depletion, and policy mismanagement. The crisis exposed the vulnerabilities of small economies heavily dependent on tourism, imports, and foreign borrowing.

Structural and Historical Causes

a) Overdependence on Imports and Tourism:

• Tourism contributed 12% of GDP and foreign exchange before COVID-19.
• The pandemic wiped out tourism revenue and remittances.

b) Rising External Debt:

• Foreign debt reached $51 billion (2022), with 22% owed to China under the Belt and Road Initiative (BRI).
• Debt servicing consumed 70% of government revenue by 2021.

c) Decline in Agricultural Output:

The 2021 ban on chemical fertilizers caused a 30% drop in crop yields, worsening food shortages and inflation (57% in 2022).

Policy and Governance Failures

a) Tax Cuts (2019):

Reduced VAT from 15% to 8%, shrinking government revenue by 25%.

b) Mismanaged Currency Peg:

Artificially controlling exchange rates led to forex depletion.

c) Political Instability:

Frequent leadership changes and corruption scandals eroded investor confidence.

External Shocks

• COVID-19 pandemic crippled tourism and exports.
• Russia–Ukraine war raised fuel and food import prices.
• Global interest rate hikes made debt refinancing impossible.

Social and Humanitarian Impact

• GDP contracted by 8.7% in 2022 (World Bank).
• Fuel, food, and medicine shortages led to mass protests.
• Over 5 lakh Sri Lankans migrated in search of employment.

India’s Role in Stabilization

• India extended $4 billion assistance in 2022–23 through credit lines for fuel, food, and medicines.
• Supply of fertilizers and rice helped stabilize rural supply chains.
• India’s role in IMF bailout coordination showcased regional solidarity.

Example: Haryana-based exporters of textile machinery and rice were impacted by halted exports to Sri Lanka in 2022 but resumed trade under India’s humanitarian assistance framework.

Sri Lanka’s crisis underscores the dangers of economic populism and debt dependency.

For India and its neighbors, the lesson is clear sustainable growth demands sound fiscal discipline, diversification, and institutional transparency.